Incorporation Decisions (II) – Where Do We Go From Here?

Budget 2017 created a stir with the announced increase and then abandonment of the increase in Class 4 National Insurance contributions for the self-employed. Ken Moody looks at the effect of other changes on the decision whether or not to incorporate.

We know that corporation tax is at 19% for the next three tax years, so it should be possible to reach some sort of conclusion as to what the threshold might be for tax-motivated incorporation (if indeed there is one).

For this purpose, we also need to factor in the effect of the reduction in the ‘dividend allowance’ from £5,000 to £2,000 from 6 April 2019. We don’t know, of course, what the personal allowances or thresholds and rates for income tax and National Insurance contributions (NICs) will be, but these will probably make little odds for comparison purposes.

The first table shows the tax/NICs payable by a sole trader with a profit of £45,000, partly as this is a convenient figure, as can be seen.

Table 1: Sole trader
Income tax	£	£
Profit	45,000	45,000
Personal allowance	11,500
	33,500
IT @ 20%		(6,700)

Class 4 NIC
£45,000 – £8,164	36,836
NIC @ 9%		(3,315)
Retained (‘A’)		34,985

The second table illustrates an incorporated business which pays director’s fees of £8,184 in line with the Class 1 NIC earnings threshold and distributes all the remaining profit as dividends.

Table 2: Director Shareholder - basic rate taxpayer
	2017/18		2018/19		Remuneration
	Workings	Tax/NICs	Workings	Tax/NICs	Workings	Tax/NICs
	£	£	£	£	£	£
Company
Profit (‘B’)	45,000				45,000
Director’s fees	(8,164)				(41,763)
Employer’s NICs¹	-				(3,237)	3,237

CT profit	36,836				-
CT at 19% / 17%	(6,999)	6,999		6,999		-
Dividend	29,837

Director
Fees	8,164				41,763
Dividend	29,837		29,837
	38,001		38,001		41,763
Personal allowance	(11,500)		(11,500)		(11,500)
Dividend allowance	(5,000)		(2,000)
Taxable	21,501		24,501		30,236 Budget 2017 created a stir with the announced increase and then abandonment of the increase in Class 4 National Insurance contributions for the self-employed. Ken Moody looks at the effect of other changes on the decision whether or not to incorporate. We know that corporation tax is at 19% for the next three tax years, so it should be possible to reach some sort of conclusion as to what the threshold might be for tax-motivated incorporation (if indeed there is one). For this purpose, we also need to factor in the effect of the reduction in the ‘dividend allowance’ from £5,000 to £2,000 from 6 April 2019. We don’t know, of course, what the personal allowances or thresholds and rates for income tax and National Insurance contributions (NICs) will be, but these will probably make little odds for comparison purposes. The first table shows the tax/NICs payable by a ... Shared from Tax Insider: Incorporation Decisions (II) – Where Do We Go From Here? Similar Articles: Record-keeping in a digital age Overdrawn director's loan accounts: Look before you leap! When it’s over: Distributions on cessation of company No Sacrifice! The New ‘Optional Remuneration Arrangements’ Rules What’s The Damage? Compensation Payments Back Terms & Conditions Privacy Notice Cookie Policy Sitemap Copyright © 2024 Tax Insider, All Rights Reserved. Terms & Conditions Privacy Notice Cookie Policy Sitemap Copyright © 2024 Tax Insider, All Rights Reserved.